The Boards No One Wants to Talk About

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Most board failures are ascribed to two fact patterns; for ease, we’ll refer to them as Theranos and Boeing. In the former, you don’t have any board members with relevant expertise, in the latter you have a basic dereliction of duty. 

OK, Theranos was probably both.

There’s a third fact pattern that people rarely discuss: the properly composed board with both hands on the proverbial wheel, who are simply… shady.

I come across it regularly, particularly in VC-backed, privately-held companies.  

There are two reasons why people don’t talk about this to any material degree.

First, private companies are private.  They are subject to far less scrutiny than publicly-traded companies, and there aren’t disclosures for stakeholders, media, regulators, and plaintiff’s attorneys to parse.

The second reason is a bit more nuanced.  That is, I think we all would like to believe that boards are objective and virtuous.  In fact, it’s a presupposition of every governance treatise.  Said differently, we don’t like to concede that the adults in the room – particularly the ones with the gilded CVs – might just be unethical.

I have a friend who was a standout reporter at WSJ and Bloomberg.  His articles used to regularly grab your attention with the admonition: “Be smart.” It applies perfectly to this subject. The incentives today in the Sand Hill Road continuum are astronomically high.  Consciously cutting corners or “looking the other way” are predictable byproducts.  

Let’s all just say it for what it is: often a VC-backed board’s willingness to act is inversely proportional to revenue growth and/or valuation step-ups. 

There are, of course, great private company boards.  But what’s behind door #3 is real, and it isn’t less common just because people don’t want to acknowledge it.

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ADAM J. EPSTEIN

A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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